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spk01: Good day and thank you for standing by. Welcome to the Richardson Electronics third quarter fiscal year 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded, and if you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Edward Yusin, Chairman and CEO. Please go ahead.
spk09: Good morning and welcome to Richardson Electronics conference call for the third quarter of fiscal year 2022. Joining me today are Robert Benn, Chief Financial Officer, Wendy Dedell, Chief Operating Officer and General Manager for Richardson Healthcare, Greg Peliquin, General Manager of our Power and Microwave Technologies Group, and Jens Rupert, General Manager of Canvas. As a reminder, this call is being recorded and will be available for playback. I would also like to remind you that we'll be making forward-looking statements. They're based on current expectations and involve risks and uncertainties. Therefore, our actual results could be materially different. Please refer to our press release and SEC filings for an explanation of our risk factors. Our third quarter set another quarterly sales record since we sold our FED in 2011. It was also our seventh consecutive quarter of sequential revenue growth, which is remarkable when you consider the number of holidays that are in our third quarter. In fact, all three business units performed better than Q3 last year, and we overcame the unprecedented absences due to COVID-19 cases, particularly throughout the month of January. Net sales for the third quarter of fiscal 2022 were 55.3 million, 22.3% higher than last year's third quarter. Gross margin declined due to a higher percentage of lower margin sales, higher freight costs, and cost increases for raw material and components. Despite these challenges, third quarter operating income was $3.6 million, or 6.6% of revenue, which is a significant increase from 315,000 or 0.7% of revenue for the same period last year. Backlog at the end of the quarter was $175.6 million, up 19.5% over the second quarter. Each of our three business units had higher backlog, driven by strong bookings growth. Within PMT, our largest business unit, backlog increased across numerous product lines, most notably in power management, semiconductor wafer fab, and magnetrons. These products are used in many new applications, including alternative energy, 5G, and manufacturing diamonds, hydrogen, and building products. I'm pleased with the performance, and I'm confident this will lead to continued growth. Considering Russia's recent aggressive actions against the Ukraine, we stopped all shipments to Russia. Historically, we've shipped less than a million dollars to Russia each year. We also have customers in the Ukraine, which represent less than $1 million in revenue per year, primarily in health care. We extend our heartfelt support to our friends, families, and customers in the Ukraine and wish for a very swift end to this unjust war. I'll now turn the call over to Bob Benn, Chief Financial Officer, to review our third quarter financial performance in more detail. Then Greg, Wendy, and Jens will provide more detail on our third quarter performance as well as our new programs.
spk13: Thank you, Ed, and good morning. I will review our financial results for our third quarter and first nine months of fiscal year 2022, followed by a review of our cash positions. Net sales for the third quarter of fiscal 2022 increased to 55.3 million, up 22.3%, compared to net sales of 45.2 million in the prior year's third quarter, due to higher net sales across all three business units. PMT sales increased by 8.8 million, or 25% from last year's third quarter, driven by strong growth from our new power and microwave technology partners for various applications, including power management and 5G infrastructure, as well as increasing shipments of our patented Altra 3000. In addition, sales for several Electron 2 product lines, including semiconductor wafer fabrication, increased from the third quarter of fiscal 2021. Canvas sales increased by 1.1 million, or 15%, due to the strong customer demand in North America and Europe. Richardson Healthcare sales increased 0.2 million, or 7.4%, year-over-year due to an increase in part sales and an increase in demand for the Alta 750 tubes. In addition to higher revenues, total company backlog increased to its highest level since the sale of RFPD of $175.6 million in the third quarter of fiscal 2022 from $146.9 million at the end of the second quarter of fiscal 2022 and $98.7 million at the end of the third quarter of fiscal 2021. Backlog increased in all three business units when compared to both third quarter last year and our most recent second quarter. Gross margin for the third quarter was 31.8% in net sales compared to 34.9% in net sales in last year's third quarter. PMT's margin decreased to 32.2% from 34.9% due to a higher mix of lower margin PMG sales partially offset by increased shipments of wind turbine modules. Canvas gross margin decreased to 32.2% from 35.2% because of higher global freight costs. Healthcare's gross margin was 25.1% in the third quarter of fiscal 2022 compared to 33.0% in the prior year's third quarter due to an increase in component scrap expense and rising freight costs. Operating expenses were $13.9 million for the third quarter of fiscal 2022 compared to $15.5 million in the third quarter of fiscal 2021. The decrease in operating expenses resulted from the non-recurrence of a $1.6 million legal settlement in the third quarter of fiscal 2021. In addition, lower legal fees were offset by higher employee compensation expenses. The company reported operating income of 3.6 million or 6.6% of net sales for the third quarter of fiscal 2022 versus operating income of 0.3 million or 0.7% of net sales reported in the third quarter of last year. Other expenses for the third quarter of fiscal 2022, including interest income and foreign exchange, were 0.1 million compared to other expenses of less than 0.1 million in the third quarter of fiscal 2021. The income tax provision of $0.6 million for the quarter reflected a provision for foreign income taxes and the offset of a U.S. tax provision against the valuation allowance. In addition, state income taxes for Illinois increased due to the suspension of net operating loss carry-forwards until the end of fiscal 2023. Net income was $2.9 million, or 5.2% of net sales for the third quarter of fiscal 2022, as compared to a net income of $0.2 million. or 0.5% in net sales in the third quarter of fiscal 2021. Earnings per common share on a diluted basis in the third quarter of fiscal 2022 were 21 cents compared to 2 cents per common share on a diluted basis in the prior year's third quarter. Now turning to a review of the results for the first nine months of fiscal year 2022. Net sales for the first nine months of fiscal year 2022 were $163 million, an increase of 28.9% from $126.5 million in the first nine months of fiscal year 2021. Net sales increased by $30.4 million or 30.8% for PMT, $5.2 million or 25.6% for Canvas, and $0.9 million or 12.2% for Richardson Healthcare. Gross margin decreased to 31.6% from 33.6%, primarily reflecting product mix in PMT and higher global freight costs in Canvas, partially offset by improved manufacturing efficiencies for health care. Operating expenses were $40.6 million for the first nine months of the fiscal year, which represented a decrease of $1.3 million from the first nine months of the last fiscal year. The decrease was due to the non-recurrence of a $1.6 million legal settlement in the first nine months of fiscal 2021 and lower legal fees, partially offset by higher employee compensation expenses. Operating income for the first nine months of fiscal year 2022 was $11 million, or 6.7% of net sales, as compared to an operating income of $0.6 million, or 0.4% of net sales, for the first nine months of fiscal year 2021. Other expenses for the first nine months of fiscal 2022, including interest income and foreign exchange, were less than $0.1 million as compared to other expenses of $0.5 million for the first nine months of fiscal 2021. The income tax provision of $1.3 million reflected a provision for foreign income tax and the offset of US tax provision against the valuation allowance. In addition, state income taxes for Illinois increased. The company reported net income of $9.6 million or 5.9% of net sales for the first nine months of fiscal year 2022 versus a net loss of $0.2 million for the first nine months of fiscal year 2021. Earnings per common share on a diluted basis in the first nine months of fiscal 2022 were $0.71 compared to a net loss of $0.02 per common share on a diluted basis in the prior year's first nine months. Turning to a review of our cash position. Cash and investments at the end of the third quarter fiscal 2022 were $39.1 million compared to $39.7 million at the end of the second quarter of fiscal 2022 and $47.4 million at the end of the third quarter of fiscal 2021. The company continues to invest in working capital to support its growth initiatives. Accounts receivable increased to $31.6 million at the end of the third quarter fiscal 2022 However, days outstanding were 39 at the end of the third quarter compared to 40 days at the end of the second quarter. In addition, inventory grew to $73.7 million from $70.7 million at the end of the second quarter of fiscal 2022, primarily due to increases in components and work in process for our manufacturing business. Capital Expenditures were $0.6 million in the third quarter of fiscal 2022, the same as in the third quarter of fiscal year 2021. Approximately $0.2 million related to investments in our healthcare business, $0.2 million was for our manufacturing business, $0.1 million was for our IT system, and $0.1 million was for other projects. We paid $0.8 million in cash dividends in the third quarter of fiscal 2022. In addition, based on our current financial position, our board of directors declared a regular quarterly cash dividend of $0.06 per common share, which will be paid in the fourth quarter of fiscal 2022. Finally, during the third quarter of fiscal 2022, we repatriated $0.5 million to the U.S. from Japan, bringing our total year-to-date repatriations to $1.5 million. Our U.S. domiciled cash and cash equivalents balance totaled $24.8 million as of February 26, 2022. Now, I will turn the call over to Greg, who will discuss the results for our Power and Microwave Technologies Group.
spk03: Thank you, Bob. Good morning, everyone. Sales for the Power and Microwave Technologies Group, or PMT, in the third quarter of fiscal year 2022 grew 25% to $44 million versus $35.2 million in in Q3 last year. In addition to strong sales quarter, PMT achieved an excellent book-to-bill of 1.47. Our sales growth and strong bookings confirm another solid quarter to what is shaping up to be an excellent FY22. Our gross margin decreased in the quarter to 32.2% versus 34.9% in the prior year, which was mainly due to some product mix as well as increased freight component and labor costs. Both business units and PMT supported the strong growth in bookings and billings in Q3. Our electron device group, or EDG, had an extremely robust quarter in bookings as we continue to take market share from our competition and continue to find new applications for our legacy tube products, specifically magnetrons, using development of synthetic diamonds and other green solutions. In addition, we continue to experience outstanding growth in our powered microwave group, or PMG, Over the years, we have added a growing line of new products and technology partners targeting RF and power management applications. This includes 5G infrastructure programs as well as programs dedicated to the consistently growing power management and energy storage applications that support numerous green initiatives. With respect to 5G wireless and power management, revenues increased by high double digits again in Q3 with a very strong book-to-bill. Power management saw growth in applications for wind energy, electric vehicles, and energy storage. Recently introduced products, such as our patented Ultra 3000 pitch energy module used in wind turbines, continued to gain traction with increased sales and bookings in the quarter. We are producing the Ultra 3000 with remarkable results in the field and millions of accumulated hours of operation. During the third quarter, we received our second patent for the pitch energy system for wind turbines. This extends our leadership position by further supporting our innovative Altra module technology. We also saw an increase in bookings with key customers such as Enel, Inver Energy, RWE, and numerous other owner-operators of GE wind turbines. Our Altra Gen 3000 design for generators and cellular base stations and critical facilities has had good success in alpha product trials. And in the quarter, we received our first beta site order with T-Mobile, We also booked our first multi-million dollar order for our power management module used in electric vehicles, in this case, electric locomotives. This order will start shipping in Q2 of FY23. Again, this product will also be manufactured, tested, and supported from LaFox, Illinois. As I've mentioned, we continue to add new products to our portfolio and are on schedule to introduce new products that support green energy applications in the first half of FY23. Our microwave component business continues to benefit from the positive trends associated with 5G, microwave communications, and SATCOM applications. These applications are utilized as people continue to work from multiple locations, sending and receiving large amounts of data. Our entire team has done an excellent job identifying NICH technology partners who collaborate with us globally. We continue to invest in and focus in resources to support these growth markets. These resources include design engineers, field engineers, and manufacturing capabilities. We also added several small niche technology partners who fill technology gaps in our portfolio. This strategy has been highly successful, and we will continue to use it to develop new engineered solution products, as well as increase our customer base, revenue, and profits by capitalizing on our existing demand creation infrastructure. We are excited to see that Over the years, in these past three quarters, our Legacy II business has had a strong return to both bookings and billings. The third quarter of FY22 continued to prove that the demand for all of our products and services did not go away with the pandemic, and we're even more excited about the trends in bookings that will support strong revenue in the coming quarter. We continue to receive support from our key technology partners, such as Corvo, Macom, a Nokia Wave, Ellis Materials, Ammo Green Tech, and Fuji Semiconductor, and key tube manufacturers in the industry, such as CPI, Talus, NJRC, and Photonis. They've all worked with us to manage our customer requirements. Our growing in-house engineering and manufacturing teams did a great job supporting increased demand for our products and new product designs. The team also supported product designs for key growth markets, including green energy applications such as the Ultra 3000, Ultra Gen 3000, and lithium-based power management module for our electric locomotives. I'm pleased with the progress we are making. We will continue to identify, develop, and introduce products using numerous technologies for green energy power management applications. However, we remain challenged by longer semiconductor component lead times and overall supply chain. This affects our component business and engineered solution products. We are aggressively investing in inventory that should position us well and fill the pipeline to ensure we can meet our customers' needs while we collaborate closely with our customers and suppliers. I cannot stress enough the value of Richard Electronics' model to our customers and suppliers. Our unparalleled in capability and global go-to-market strategy are unique to the power and RF and microwave industries. We have developed a powerful business model, including legacy products and new technology partners that fill well with our engineered solution capabilities. Through our steadfast and creative focus on customers, We will continue to excel by taking advantage of opportunities when they arise. Our backlog has never been stronger, and the execution of our strategy has never been better. There's no question our customers and technology partners need Richardson's products and support more than ever. And with that, I'll turn it over to Wendy Dedell and Richardson Healthcare.
spk10: Thanks, Greg, and good morning, everyone. Sales for the healthcare group increased in Q3 to a quarterly record of 3.13 million, This was 7.4% higher than Q3 of FY21. We sold a record number of tubes during the third quarter, led by increased tube sales in China. Sales of parts exceeded prior year levels, while equipment sales also exceeded prior year levels. They remained constrained due to ongoing lack of used systems available for purchase and resale. Gross margin in the second quarter was 25.1% versus 33% in Q3 last year. Our gross margin was negatively impacted by higher-than-anticipated scrap rates in the quarter relating to the use of reclaimed parts, as well as rising freight costs. However, gross margin improved slightly over the most recent second quarter as we again increased the number of tubes produced and continued to address new component quality from our suppliers. The most significant roadblock to higher sales and margin continues to be the breadth of our CT tube product offerings. Our next tube launch is the Alta 750G, the second tube in the Canon series that works on newer Canon Toshiba CT scanners. We have one Alta 750G tube in beta. The second is scheduled for install next week. We anticipate a full rollout after 30 days of acceptable performance. Sales growth will be gradual as we get the Alta 750G into the market and Canon CT scanners come off OEM service contracts. We continue to make good progress on the Siemens repaired tube program. This is a series of four tubes, including the Stratton Z, MX, MXP, and MXP46. The Siemens install base is considerably larger than Canon, and there are no third-party replacement options for these types. We are on track to release the Siemens types in calendar year 2022 and 2023, with revenue starting slowly in fiscal year 2023. We are also evaluating other tube types for future development, but not at the expense of our Siemens program. Our number one priority is to shorten the time it takes for healthcare to provide positive operating contribution to the company. Bringing more tubes to market will improve sales and margin and help us accomplish this goal. I will now turn the call over to Jens Rupert to discuss the results for Canvas.
spk11: Thanks, Wendy, and good morning, everyone. Canvas engineers, manufacturers, and sells custom displays to original equipment manufacturers in the industrial and medical markets throughout the world. Canvas delivered an excellent performance with sales of 8.1 million for the third quarter of fiscal 2022. Strong customer demand on a global basis drove the 15.0% increase in sales over the same period last year. Cross-margin as a percentage of net sales was 32.2% during the third quarter of fiscal 2022, down from 35.2% during the third quarter of fiscal 2021. The decrease in cross-margin was related to an increased freight cost impacting many customers across the global supply chain. Extended lead times on several key components also remain an issue. However, our close relationship with customers and partners overseas enables us to procure long lead time components, which has helped us achieve a new record backlog of 52.4 million this quarter. Canvas' backlog increased 19.4% from this year's second quarter and is up 66.3% on a year-over-year basis. As you can see, momentum in our business has strengthened. We are optimistic that the high demand for custom monitors, touchscreens, and all-in-one systems will continue for the foreseeable future. During the quarter, we received several new orders from both existing and first-time medical OEM customers. Some of these applications include cell analyzers, cryolipolysis, corneal crosslinking, eye examination, dental treatment centers, laser ablation, robotic assist surgery, medical device control in fully integrated operating rooms, surgical navigation, patient monitoring, surgical video documentation, diagnostic imaging, and ophthalmology. In the non-medical space, our products are used in a variety of commercial and industrial applications. This includes CT scanners for inspecting luggage at airports, human-machine interface for high-speed high-precision milling machines, product dispensers for retail applications, and tailor-prompting products. We are pleased with our team's performance. The new record backlog positions us for future growth. From the variety of customers and applications, as well as the value of orders from existing and new customers, it is clear we offer our global customers outstanding products and local service. While our sales organization stays focused on new opportunities, I continue to review and adjust our business strategy to improve the operating performance of the division. Maximizing cash flow is an ongoing priority. We continue to work closely with our partners to help us reduce inventory while being able to meet the demands of our customers, particularly with the challenges brought on by the industry-wide supply chain delays. I will now turn the call back over to Ed.
spk09: Thanks, Jens, and congratulations on the entire Canvas team for another excellent year. We're very pleased with the company's performance in the third quarter, particularly given the challenges we face and the very fluid business environment. Our backlog is growing, and we're working around the clock to increase production and meet our customers' demands. We will continue managing supply chain issues as well as higher freight costs, particularly with rising fuel costs. We're also focused on rewarding our team members for helping the company grow. Fortunately, the amount of lost time due to COVID-19 pandemic has decreased substantially. Overall, activities across all our global markets are robust and business remains strong. We're investing in equipment and expanding our manufacturing areas to take advantage of new opportunities. This expansion will support growth for our alternative energy solutions as well as our legacy products, such as magnetrons for diamond manufacturing and marine applications. We're hiring additional engineers and production technicians as quickly as we can find them. We're cross-training employees to improve flexibility of our workforce and using overtime to meet customers' requirements. The team has really stepped up when we need them the most. We're reviewing every sale, every opportunity, and every new hire to ensure we're using our cash wisely. As we celebrate our 75th anniversary on May 24, 2022, it's an exciting time for the company. At this point, we'll be happy to answer a few questions.
spk01: At this time, as a reminder to ask a question, you will need to press star 1 on your telephone, and to withdraw your question, just press the pound key. Once again, that's star 1 for questions. Please stand by while we compile the Q&A roster. And our first question will come from Landon. From Wellington Shields, your line is open.
spk00: Thank you. Ed, Wendy, and the group, congratulations on what is a great quarter. You're very welcome. There is, however, an elephant in the room, and the elephant is margins. And we all appreciate, because it's affecting everybody across the board in terms of freight and cost of goods sold, At what point in time can pricing come back where you create significantly better margins than you have in this quarter?
spk09: Well, I think it will be pretty much linear. You know, we've been caught in some areas. For instance, in Canvas, most of our product comes in from Taiwan or Japan or Korea, and we do the value-added either in Germany or in Boston. but we've had to absorb the freight costs for some period of time. And now Jens has done a good job talking with our customers, and they understand the additional freight costs, and we're able to pass some of it along. But in one quarter alone, we had $150,000 additional freight costs. I'm not sure. Jens, what was it in this last quarter? Can you remember?
spk11: Actually, I don't remember the exact number, but I think for the first nine months, it's more than $900,000. Wow.
spk09: Yeah, it's amazing. So anyway, we're well aware of those costs, and we've had a lot of increases in raw materials, things like oxygen-free copper and ceramics and things of that nature. And we're working hard to increase the prices and pass that along. But I think probably this time next year it will be back to normal and it will be linear between now and then. All right, thank you.
spk00: Ultra 3000, give me some thoughts, please, on – fiscal 2023 in terms of revenues?
spk03: Well, Howard, as you know, we started the year with about $10 or $11 million in backlog. We continue to add new customers. We've booked a number of multimillion-dollar orders. And these rollouts are very similar to any rollout. We have a lot of experience with 3G, 4G, and 5G rollouts. So it's time. They're testing a product. We have a number of large customers that are doing beta site testing. And across the board, historically, with the results we had with these phase ones, we fully expect us to continue at a run rate. I believe I mentioned this group should be $45 million in one to three years. And we're definitely at that run rate.
spk00: Could you repeat that? Because it was static on my line. what your run rate is potentially for 2023?
spk03: Well, our three-year run rate right now, we looked at this group, and based on the sales, our bookings will be much higher than that. But we're at a run rate to do over the next two years about $45 million.
spk00: Okay, thank you. Battery Street Energy, cell towers, beta testing, you expect to see some revenues this fiscal year? Upcoming?
spk03: Just small beta site revenues. That program is also going very, very well. It's the UltraGen 3000. We have beta site testing going with T-Mobile and Phoenix. They placed a second order for 15 more hours with Zilfair. It's running perfectly. But I don't think we'll see any large revenues or bookings until probably Q1, Q2 of FY2300. But we're very, very happy with the speed that this thing's been rolled out and the design itself. And that product also will be patented.
spk00: Can you give us some sense of what your thoughts are for Q1? I mean, is it $2 million, $5 million, any sense at all?
spk03: We're not holding it to you. Howard, it's really hard to say. I mean, if you just do math, the number of towers that they have, But, you know, these companies are very conservative when they put a new technology because it isn't a new technology to generators. So from a bookings point of view, Howard, I would think in the first half of the year, you know, three to four million in bookings. How much of that will actually ship? I don't know, Howard. I can't give you an answer on that. No, fair enough.
spk00: Let's go to another subject in terms of ultracapacitors and locomotives. You've accomplished, you had an order for two. That order has been completed. Is that a correct statement?
spk03: No, Howard, and it's not an ultracapacitor. You know, we're not in the wind turbine market. We're not in the electric locomotive market. We're in the power management. And we've been working with Progress Rail and Caterpillar for a while and developing a module. In this case, it's a module with our partner, Ammo Green Tech. It's a lithium-based module. We have just completed that design. We have booked the first multimillion-dollar order for a number of electric locomotives. They continue to gain market share in terms of outfitting these locomotives, and we expect that to be also a $6 million to $7 million opportunity in FY23. But we won't start building that until June. No, no, fair enough. My understanding is about, yeah. I just want to add to that. In these opportunities, you know, all these opportunities that were in these new products are driven by components. And the greatest thing about this is we have weekly calls with their engineering teams. And this is Caterpillar. There's so many opportunities that are going to come out of this. Electric locomotives, yes, we are their lead partner for the powering system of that. But you look at, you know, smart agriculture. They're making as much of their products green. And you've got agreements with technology partners in the 5G world that are world leaders. And in the power management side, the leaders in that type of technology and an ever-growing design team I'm more excited about the relationships and the opportunities that have come out of it as I am with these individual opportunities, which, by the way, as you've seen, are multimillion-dollar opportunities.
spk00: My understanding, there are about 400 and some odd thousand locomotives just in the United States. Does that sound about right to you?
spk03: I don't know about that. I mean, they're diesel. There's not that many electric locomotives. Well, they're diesel I'm talking about. That's what you're – yeah. Yeah, you know, they mentioned they have 60,000 diesel locomotives globally. This was Progress Rail that they outfit. So I don't know what the total is, but those are big numbers. We'll take half of it.
spk00: I appreciate that. Last question. Last quarter you mentioned other products in the portfolio, sometime first half or 2023. Can you expand on that?
spk03: Yeah, there's, you know, in listening to the customers, and what issues they're having, there's other products that fit our niche. And we really go after products that we have a niche or we add value. And so one of these products, which we're introducing Q1, we might announce it before that, but we'll be doing beta site testing in Q1, also goes in the wind turbine. We have a number of other products that will go into critical facilities for power management. But the one product that we're going to introduce in Q1 is a larger opportunity than the Altra 3000 itself. That's all I have.
spk00: Thank you again. Congratulations on a good quarter. Ed, Wendy, thank you, all of you. Thank you. Bye. Thank you.
spk01: Our next question will come from Ross Taylor from ARS Investment Partners.
spk06: You may begin. Thank you, and also congratulations on what's really shaping up to be a great year. Howard addressed some of my issues, but to kind of recap, what you're looking at is the operating margin of the business should be recovering incrementally to kind of historic levels over the next three, four quarters as you're able to pass the cost increases for components and freight on to your customers at this point.
spk09: Yes, that's correct.
spk06: Okay. And looking at that, I listened to you guys talk and you're in a number of really hot button areas. You were providing some really exciting technology. Do you see anything about the outlook for your business that should slow your growth over the next couple of years?
spk09: Not really. When you look at $175 million backlog, that's grown from 140 some million in the last quarter, At the same time, the sales have grown as well. You can understand that the next year or two are pretty much guaranteed. We don't see anything that will slow us down right now. There's no question that we're on the verge of a third world war and things of that nature that we have no control of, but We do very little business in that area, so that doesn't have too much impact, but certainly there are things like that that could impact this that we don't control.
spk06: But also being equal, I'm listening to you talk about the new products, new product opportunities, and the like, and it really sounds like you're on a ramp business. Your margins, while they've been softer than historic, are you expect them to be recovering? We look at this in a market that trades at 17, 18 times earnings. Why do you think it is that your shares get so little respect? I mean, we're looking at a stock that, as I said, you're in every area. It seems like you want to be in. And if you cash adjust your share price, you're trading at nine times earnings, which is, you know, basically almost like you're going broke. What do you think that market is missing or what do you need to do to get the market to wake up to the opportunity that's sitting in this company?
spk09: Yeah. Well, we don't understand it either because, you know, we just mentioned that next year will be our 75th anniversary. And I hate to admit it, but I've been involved for 60 years. And I would say that this is the most exciting time in my career. We look at the business like a table with six legs and five of them are on fire right now. And we just we can't produce all the products that we have orders for. And health care is coming along. We think by 2024 that we can start to show a profit in healthcare and, and that will add a great deal to the bottom line. I guess, you know, we sold our FPD in 2011 and took the company from being 700 million in sales and a thousand employees and, and losing a ton of money down to a company that was 140 million. But we kept the international infrastructure, which was important to the two business with 24 foreign subsidiaries and 60 offices all over the world. And so it took us a long time to add enough products to fully absorb that infrastructure. And when we got to 160 million, we broke even. Last year, we were at 177 million and showed a small profit. And now this year, we'll be 215, possibly 220, and show a very nice profit. And I think investors that are aware of the company for a long time are saying, this old guy isn't going to get it right ever. But it's starting to get there now, and I think that in the years to come, the company will be very profitable.
spk06: Just to be blunt, even if you don't get it right, quite honestly, the business executes well enough and the value is there that this is, to me, probably the greatest value I see in the equity market today because you're making money and you're going to make more. It seems like the wind turbine business could generate a substantial portion of what the company generated in revenues all of last year in a year or two. Would that be a wrong assumption?
spk09: No, we think so. That's the most exciting business we're in right now. The green energy business, not only the wind turbines, but the electric locomotives and the cell business, just the opportunity is amazing. And fortunately, the patents that we have were in early. I understand that lots of people understand the opportunity in green energy, and there are lots of people working on that market, but we seem to be well ahead of a lot of the competition.
spk06: Talk about your cash, and you've obviously been investing some of that cash in working capital and the like, but you're also generating cash as a business as you roll forward, should be generating it. It's not hard to envision next year you should earn well over a dollar share in earnings. I think it looks like this year you should probably earn, you know, 90-plus cents a share in earnings if you just can keep the same earnings power on what I would expect will be higher revenues in your fourth quarter. What do you do with that cash? Is that part of the problem, that the market sits in and looks at, you know, what's effectively a quarter-plus of your market capitalization sitting in cash and doesn't see it?
spk09: Yeah, at the moment, we're just funding the growth of the business. First of all, we have 24 foreign subsidiaries, and as Bob mentioned, only about $25 million of the cash is in the United States where we can use it. We have to carry about a half a million dollars in each of the foreign subsidiaries to keep them within their legal requirements. We can use that cash. We can move it around, borrow it from subsidiary to subsidiary, and fortunately, we don't have that problem right now. But as you saw, the inventory was up very substantially. We have enough ultracapacitors in the building to build every order and every order that we are projecting. And we did that for a reason. We haven't been able to ship as fast as we wanted to because there's been a shortage on integrated circuits, which we're now getting in stock. But, you know, it's basically funding the receivables, and the inventory that's required for the growth that we're seeing. We should be, you know, this year we'll use a little cash, and it looks like next year we'll go cash flow positive.
spk06: Yeah. And so what you're saying is this 20-plus percent top-line growth is actually component-constrained growth. So as components become more available, that growth should accelerate.
spk09: Yeah, it's certainly true. Look at the backlog, you know, the $175 million-plus backlog. And, you know, those orders are set up, particularly in EDG where we're making magnetrons. If we could build them, we could ship every one of them today. It's just we can't build a product fast enough.
spk06: Okay. Well, you guys are doing a great job operating it. I think we need to think about, you know, getting some coverage and getting people to actually care about the business because the opportunity is clearly there. You're one of the most attractive people. As I said, on a valuation basis, it's hard to find something in this market that comes anywhere close to a 20-plus percent top-line grower trading at a single-digit cash-adjusted multiple.
spk09: Well, we appreciate your confidence, and we absolutely agree with you.
spk06: Well, let's hope we both prosper in the next year. All right. Thank you very much. Thank you, gentlemen.
spk01: Our next question will come from Tim O'Connell from Chain of Lakes Investments. You may begin.
spk15: Hi, good morning, and congratulations on the great quarter.
spk09: Hi, Tim. Thank you. Hi.
spk15: You know, so some of my questions have already been answered, but I was hoping for a little more color on the locomotive business. The way I look at it, you know, that the revenue number per locomotive is how many there are in this world, your relationship with progress, and, you know, the revenue number per locomotive. You know, this appears to be a much larger opportunity than the wind turbine business. So, you know, my questions are what kind of market share do you think can get there? How quickly do you see these manufacturers adopting battery power? And kind of what's the plan to go after this market, whether it's, just with Progress or any other manufacturers? Thanks.
spk03: Yeah, so right now we have 100% market share with Progress Rail Caterpillar. And there's really two leaders in this market. It's Progress Rail and GE Transportation. Our partnership is with Progress Rail. It's at a design level. level and there'll be other products our content continues to grow as they ask us to design other parts of the system other than just the in this case not just that but the module so right now our contents about a million dollars a locomotive and um and that growth is really dependent on how much market share uh progress uh rail grabs um we expect this to be you know, in terms of bookings as they roll these electric vehicles. I think if you look online, you can see companies like Union Pacific, Long Island Railroad placing orders, and they mentioned Progress Rail. So you can kind of get some numbers of what that's expected. So, yeah, we're very excited about it. It's really dependent on how much market share Progress Rail gets, and we believe they're going to get a majority of it. And And I'll just add to that again, because I'm on these weekly calls, the opportunity in other products within Caterpillar also, yes, that overall makes us bigger than the Ultra 3000. But the Ultra 3000 business is going to generate other opportunities from these same owner-operators. And we are talking to people like Siemens and GE, who are the manufacturers. And there's another product that we'll introduce in Q1 that is causing them a lot of pain due to the lead-acid batteries that will more than double the opportunity if you want to call it the windmill ultracapacitor business.
spk15: Okay, thanks. Good caller, and I just think this is such a great area for you guys to be in, an undiscovered green energy company here with Richardson.
spk03: Well, the interesting part of it is we booked the first large order. One of the things we used every aspect of Richardson 75 years. The reason we beat our competition is these products are sent to 15 to 20 different sites, in this case all throughout North America. Our distribution business, which has been around for 75 years, can do that with their eyes closed. Our competition couldn't do that. On the locomotive side, They're mandating U.S.-based railroads that it has to be manufactured and tested and supported from the U.S. That just was perfect for us. We're here in LaFox, Illinois, and we have niche capabilities. We've over years these high-powered tubes that we make and thermal dissipation that they've been working with for years. We have just world-class knowledgeable engineers of ultracapacitor. technology and we're very selective um yeah i could come up with 15 other green products but we have a real niche and again it's big money it's tens of 20 million dollars but um it's still niche niche for us and we just have found um after 15 years of ultra capacitor experience that uh we have the ability to address these somewhat niche applications better than some of these larger companies. And you're right. You put it all together, it is absolutely a home run.
spk15: Great. I'm looking forward to seeing your guys' success. Thank you.
spk09: Thank you very much.
spk01: And our next question will come from the line of Kadia Ritchie from Ritchie Capital Group. You may begin.
spk14: Hi, good morning. Thank you so much for taking my call. Yeah, congrats on your performance. In reference to Ross Taylor's comments, our team is new to Richardson, and we're continuing to learn about the business over time, so perhaps others are taking notice as well. We hope so. Yeah. It seems that you're delivering quite a bit of momentum in the business, and we noted the significant growth in your backlog that continues to build. Can you possibly characterize this growth a bit? You know, what part of that growth could be related to the global supply chain, and could there possibly be some overordering or pulling future quarters forward versus, you know, a real increase in demand that can be repeated? Can you discuss that?
spk09: Well, a very large share of our backlog is for products that we manufacture, and on a lot of those products, we're either sole source or very nearly sole source. There are other companies that can make the product, but it would require the customer to redesign the equipment to use their product. So we don't see overordering. That type of thing normally happens in the commodity semiconductor business, and I've had Greg comment on that. A very, very large portion of our backlog is for products that we manufacture where we are sole source or nearly so.
spk14: Got it. Thank you. And you mentioned that it was mentioned earlier in the call that you're aggressively ordering inventory you know, so you can meet your future demand. Can you discuss how you're thinking about acquiring inventory and how has your strategy really changed in the current environment?
spk09: Well, in most cases, for instance, in the integrated circuit used in the ultracapacitor, the delivery has been 48 weeks, but fortunately with Greg's relationship with the people in the semiconductor industry, he's been able to get the product. And I don't know, Greg, what have we got in delivery on 15,000, 17,000 units so far? Yes.
spk03: So the semiconductor industry is my background. But, you know, Richardson's always been very aggressive on inventory. And so when we started seeing these orders and we talked to the – because there's a part of our business that's quite large that is They're made by Corvo, Macom, Fuji, all these Tier 1 semiconductors. We talk to them daily, and they give us insight of what's going on. And if we see a hiccup coming, we're very aggressive about getting the inventory. So even though we are frustrated that we aren't getting as much as we want, I really think Richardson has done a better job than our competitors, and we've actually gained markets there because of our aggressive ordering and just our communication. But still, you know, the RF and wireless and power world is a very niche, incestuous market. And, you know, I've been doing this 35 years, and most of the people on my staff are doing the same. So we have contacts. We talk all the time. We communicate information. I just think we've done a good job getting in our orders and, you know, communicating with our suppliers to – to get ahead of the game, and I think we've done a better job than our competitors, and I think that is part of the reason we're gaining market share.
spk09: You might have Jens comment on Canvas. $50 million of the backlog plus is with Canvas, and Jens is a display engineer who's been in the business a long time, and he has free contracts with these medical OEMs where he's bringing in LCDs or ordering them out 12 months in advance to make sure the customers have the product. Jens, do you want to comment on that?
spk11: Yeah, I think you addressed it very well. I mean, we have customers that place orders for a long time out, basically two to three years even, and sometimes we are still struggling to get components. However, due to those long-term contracts and relationships we have, we have, I call it secret sources, where we can still get the material almost on time for everything we need. So it's a great relationship we have with our suppliers, so I'm not very disturbed by you know, or pessimistic about the future. So I'm looking forward, you know, to serve the customers, you know, with the products they need on time.
spk14: Okay, great. Thank you. And just one last quick question. Can you discuss any challenges that you've had on the workforce management front in regards to, you know, finding, you know, the engineering talent and managing, you know, kind of rising salaries and how you're navigating that front?
spk09: Sure. Wendy, you want to comment on that? You've been in the front on that one.
spk10: Yeah, so I'll start. So just to keep it in perspective, one of the data points I find particularly interesting and illustrative to answer your question, since the beginning of the calendar year, in LaFox manufacturing alone, we've hired 37 people. So we are using a combination of all the traditional sources to find people. We've increased our – finder's fee to our employees for bringing in people. We've hired a recruiting specialist to add to our HR team to specifically go out and proactively find candidates for positions. In the engineering area, we've had a really strong intern program over the past number of years and we've been fortunate to be able to bring in a lot of those engineers as full-time employees as they graduate. And then Greg Peliklin and Greg Kinney have done a great job of also finding additional engineers to join our team. So on that front, it's a continual recruiting effort. We're hiring, again, more people than we've hired in a long time. It's not always easy, and not surprisingly, right? I mean, we have the same challenge every other company. We're fighting for employees. We have raised our minimum salaries, our minimum hourly rates, to be able to attract more people. That has added, obviously, to our cost pressure, but it's more important for us. I mean, we've got people right now working six and seven days a week every single week in order to meet the demand. So, you know, we are taking care of them, we're giving back to them, and acting responsibly in terms of our compensation programs.
spk03: And that referral bonus goes to any investor that refers something to us. Yes, yes.
spk10: We've got investors that are sending us, you know, resumes and people they know. We went to a conference last week.
spk15: It applies to anyone and everyone.
spk10: Yeah, so it's good. We can always use more, and it's a continual effort.
spk14: All right, that's great to hear. Thank you. That's all my questions. Thank you, and congrats again.
spk01: Thanks very much. Our next question will come from Walter Schenker from Mass Partners. You may begin.
spk08: Hi, Walter.
spk01: Good morning.
spk08: Hi, Ed. Hi, Wendy. Well, I thought no one was going to ask Wendy a question, but you just got one. But in looking at the medical market, one of the things you learned and therefore we learned After you entered the market was that a significant number of potential customers were under maintenance contracts. And therefore, until those rolled over, there really wasn't much of an opportunity for you. But over time, the opportunity should grow as you pick off some of these people over time. In looking at the year-over-year, and I had to look at one quarter, Is that not happening to the degree you hoped, and therefore you really need a broader line, or can we see some more significant growth as people come off maintenance contracts and theoretically are open to save some money if they go to you instead of their prior contractor?
spk10: So, I think with the launch of the G, the second tube in the Canon family, That will open up the door for more people to take their systems off the OEM contract. Right now, we only have the D, as you know, and that covers a certain range of Canon CT scanners. The D expands that range, and so people would be more open-minded to using a third-party service organization because they don't run the threat of having some of their equipment still have to be covered by the OEM. So that's going to help, I think, increase the sales of the D and the G. So that answers part of your question. Certainly, expanding our product range is absolutely critical, Walter, as we've been discussing. Having the Siemens range of tubes, and again, there's four in that series, That market is much, much larger than the Canon market. The install basis is much larger. Siemens, I think, is the number one player in CT scanning market. So that, again, will add more volume. And I think that success begets success. And the more tubes you get out there, whether it's a Canon tube or it's a Siemens tube, the more people will come to you and look to you for additional purchases. So it's really a combination of getting that G out there, which will help us get more Canon equipment off a contract, and then the volume will be incrementally driven by the Siemens program. Does that answer your question?
spk08: It does, just I guess it's still too small. Initially, maybe somewhat surprisingly, despite you being very small, there's some pricing adjustments by the dominant player in the industry once you entered and tried to underprice them. At this point, pricing, and I realize it's only on one product, is reasonably stable.
spk10: Yes, it's reasonably stable, yes. We don't see anything crazy going on.
spk08: And we won't know how Siemens is going to react until you're in the market.
spk10: That's correct. Again, optimistically, perhaps we don't see them having the same knee-jerk reaction. I mean, as we've discussed, we think there's been a lot of money left on the table, but I think we collectively feel that Siemens will be less likely to have that kind of cost reduction.
spk08: Okay. And then just my final very quick comment, which is not going to get a response, so I'm doing it because I can smile and say it. It's to Ed. I couldn't get you to buy. Many people couldn't get you to buy that stock when it was half the current price in the more recent periods. As you go into a positive cash flow and maybe significant positive cash flow, going forward in 23 and 24 fiscal years. And Ross laid out how cheap the stock is, which we all agree. I, as one shareholder, would very much appreciate if you revisited buying back stock. Again, you're only a small premium to book. You've got a lot of cash. You're at a very low multiple. I couldn't push it before, but maybe in 23 and 24, there's hope that the company will at least consider it if the stock continues to be so undervalued. That's just the statement.
spk09: Thank you. Well, we did buy $65 million with the stock back after we sold our FPD. And at the time, we ended up paying a price somewhere between $8 and $9, and I thought it was a fortune when the stock went to $4 or $5. But it looks pretty good today. So you never know. Never say never.
spk08: Okay, thanks, Ed.
spk09: Thanks, Will.
spk01: Our next question will come from the line of Eric Landry from BML Capital. You may begin.
spk02: Morning, Eric. Good morning. Hi. How are you? Hi.
spk13: Good. Good morning.
spk02: Good. Great quarter. I'm so happy for everybody there. What a difference three or four years make. I remember back in – some of the comments in 2018 and whatnot. This is so much nicer. Anyways.
spk09: We agree. You've only been with us about, what, eight or nine years, Eric, something like that, maybe more.
spk02: It's been a while, but it's worth it. So anyways, I suspect, like you guys, I'm a little surprised at the stock price today. And a lot like what Howard said, I think a lot of it has to do with the margin degradation. So perhaps you could comment on how much, I think it's 310 basis points, of the decline is due to an increase in shipping and your inability thus far to raise prices commensurate with your cost increase. Do you have any kind of an estimate as to how much?
spk09: Yeah. Wendy did a fairly decent analysis of it.
spk10: Actually, Bob did that. Bob hasn't gotten to speak yet today, so we'll let Bob answer that. Okay.
spk13: Yeah, one thing to keep in mind on the margin is we're in a lot of different businesses, and the mix of sales, whether it's product mix or customer mix, always affects us differently every quarter. So I think that's important to keep in mind. And my analysis shows that that's over half of the – you know, the change, the three-point change in the corridor. Yes, certainly component prices and labor costs are affecting us. I certainly don't want to give you the impression they're not. You know, I show that about a point roughly. And then the rest would be other things. You know, we talked about the additional scrap in the healthcare business, you know, and freight as well that we've talked about. So does that give you a rough idea, Eric, of...
spk02: So a little bit more than half you expect to be able to get back through price increases, correct? Yes. Okay. Yeah, I just want to make sure that people are aware that you're not transitioning into a lower margin business through all this growth.
spk09: Not at all.
spk02: Not at all.
spk09: It's just we've gotten caught in between with logistics costs and the higher raw materials costs, higher labor costs. you know, everything's going up and we haven't been able to react fast enough. Right.
spk13: If I can add a little bit, Eric, Eric, one more thing. Um, last quarter, our margin was 32.7% compared to 31.8% this quarter. So it's still a drop, but not nearly as much. And I might add last year's third quarter at 34.9% was our highest point all year last year. Um, so, you know, I think it's important to, to keep that in mind as well. Gotcha. Um,
spk02: Thank you. Wendy, of the 37 you've hired in the last three-plus months, what percentage is that of the people that you need?
spk10: Well, if I understand the question, we need 100% of them. Oh, you mean how many more do we need? Yeah. Yeah, I think we have – I'm going off of memory here and approving Rex. I think we probably have – five to ten additional recs open, most of them in production. On the engineering side, that is more, at this point, opportunistic. Healthcare, I think we're full, but in Greg's area and supporting the Ultra 3000, I think we constantly have an open mind. Maybe, you know, we could take up to another five engineers if you have people you want to send us.
spk02: Okay. I don't, unfortunately. I was thinking maybe I could drive down there one or two days a week and help.
spk10: We have all volunteered to do the same thing. We're like, look, I can build an Ultra 3000. I can, you know, I can get out there.
spk03: Eric, we do have a second shift on the production of the Ultra 3000, and it pays time and a half. I don't know if you're good or not. Yes.
spk02: I don't know that I'm qualified to build all the 3000, but I could probably sweep the floor.
spk03: That, that would probably be, we'll just test your product twice.
spk09: Can you put a director set together?
spk02: There you go. Perfect.
spk09: No problem. You can build the ultra capacitor.
spk02: There you go. Sounds good. I'll put my app in. So I just want to real quick. I know this is getting long here. I just want to address the, um, And the way I see it, this is probably somewhere around maybe your second or third largest opportunity right now. Is that anywhere near accurate?
spk09: We just looked at the total backlog, Wendy. What is it on the magnetrons?
spk10: It's incredible. Yeah, 13 million, 14 million.
spk09: Yeah, 13 or 14 million is the backlog right now in the magnetron business. And, you know, that's almost double what it was a year ago.
spk02: Mm-hmm. And what are the growth prospects? What do the growth prospects look like? I mean, it's probably nowhere near the Ultra 3000, but I assume it's material.
spk09: We could sell every one we could make right now. You know, some of these new technologies, the synthetic diamond thing has just gone crazy. And now they're using magnetrons also to – they take tires and they take the carbon out of it and they make tile, so roof tiles, floor tiles. Um, big company in India is placed to over a thousand magnetrons with, it's called carbon craft and they make both synthetic diamonds and tile. Um, and then the applications for hydrogen is just, uh, you know, a fuel of the future. There's just so many applications now for microwave where, you know, semiconductors just won't handle the brute power and the high frequency at the same time.
spk02: Right. So it's, it's, um, Do you have any type of a patent on your Magnetron or any type of a sort of a competitive barrier so that someone can't come in?
spk09: Lots of people have tried to make the YJ1600 and people like Talus and English Electric and they've all failed. So it's a technology that is a lot of black magic. And no, there are no patents on Magnetron. power grid tubes that I know of any longer, they've all expired. But once you can learn to build them and other people don't know how to build them, you're pretty much in a sole source position.
spk02: And that's what you feel like you are with, with this thing. So someone who makes, let's just, I mean, this is a dumb question, but someone who makes the magnetrons for our everyday microwaves, they could, they enter this market.
spk09: Yeah, they do. You know, Panasonic makes one and so does LG. It's a different magnetron. And the only way you can use it is to build a new piece of equipment and build a power supply and all the accessories to utilize that magnetron. And there are people that do that. You know, if you look at companies like Muga and Ceram that build generators, they buy from those people and they customize their equipment to use their product. At the same time, Both those companies have been after us. They want to buy all the production that we can make of our magnetron. So we have something that they can't get.
spk02: And how long have they been trying?
spk09: It's perpetual, and we sell to them. As long as we can build them, we'll sell to anybody.
spk02: Okay. Great. Thanks. Last thing, because I know we're getting long here. Greg, the locomotive product, is this similar to – the cell tower product where it's used as a starter, or is this actual, are these actual completely 100% battery-powered locomotives?
spk03: Yeah, 100% battery-powered locomotives. The module, it doesn't use ultracapacitors. It uses lithium iron phosphate batteries. And it's about the size of two car batteries together. And in a standard locomotive for the power levels that these are going into, there's about 160 per train, but it runs the entire train. Now, also I want to add, Eric, that the first ones that are coming out are like for short distances. For example, you know, taking the train to Chicago. These aren't long haul. Those are coming, and that's some other designs we're working on with with Progress Rail and Caterpillar.
spk09: You ought to tell them the beta, the original design that we're going to make weighs 10,000 pounds. That's another good thing.
spk03: We've got a big cement loading dock out there. Yeah, and it's interesting. This is how this whole thing works. You talk to them about a component, and then you build a module, and then they keep adding more to it. Can you build this? I mean, eventually, could we build the entire system here in LaFox? Yes, but right now, the main one is the battery module that goes in the locomotive, and they're in parallel circuit together, and they run the complete train. And then, obviously, just like an electric car, it's brake regeneration. And right now, they're used in shipyards to move things around, and then for commuter trains going from here to Chicago. The big market, obviously more power, more of these batteries as they get the long haul, you know, sending parts across the country. And, again, I just can't – we are a design partner for Progress Rail, and as they gain market share, we'll continue to gain market share.
spk02: Well, okay, that's it for me. I appreciate it. And you guys, you're really kicking ass there, so great job. Thank you.
spk13: Thanks, Eric.
spk01: Thanks, Eric. And our next question will come from Mike Hughes from SGF Capital.
spk04: You may begin. Good morning. Thanks for taking my questions.
spk09: Good morning, Mike.
spk04: How are you, Ed?
spk09: Good.
spk04: Good, good. Good to hear. Just a follow-up on the locomotive business, and maybe I missed this, but is it safe to assume the gross margins on that business will be kind of in line with the company-wide average, kind of 30% to 35%? Is that fair?
spk03: Yes, it will be accretive. All the products, the UltraGen 3000, Ultra3000, and then the lithium-ion EV locomotive are accretive to the overall corporate margin of 35%.
spk04: Okay, great. And you said the content per locomotive, and this was your content, was a million dollars, is that correct?
spk03: Right around a million dollars. I think, yeah, our current content is about a million dollars a locomotive.
spk04: Okay, okay, good. And then the backlog is really impressive, but I assume everything that's in the backlog is price protected. So just Number one, if you could confirm that. And then number two, is there anything you could do on a go-forward basis to kind of – this is probably the highest rate of inflation you've seen since the 1970s. Is there anything you can do on a go-forward basis to protect yourself from booking something now and it's not going to ship for a year from now where raw materials might be higher? Can you just address that issue?
spk09: Well, we have a policy, you know, that when we quote it, the quote's only good for 30 days. If we take a frame order and we guarantee them a price over a period of a year, then it's on us. And we also normally have a currency fluctuation clause in each order as well, so that we're quoting in the U.S. dollar, even though the customer may be in India or China or Europe, somewhere else. So we try to protect ourselves as much as we can, but obviously we're getting caught now, and we think that we can correct that sort of on a linear basis over the next year.
spk04: Okay. And then on the last call, Ed, you indicated that you thought you could grow 15% to 20% at the top line next year. Is that still the case? Is that still your thinking? Okay.
spk09: Yeah, absolutely. You know, with $175 million backlog and we'll end the year probably somewhere between 215 and 220, you know, it probably we can look at 250 next year or something like that, maybe a little more.
spk04: Okay. So if you kind of did the midpoint for this year, let's say 218 and you grew at a 15% rate, that would translate into $250 million, right? which is just shy of $63 million a quarter. So at what point do you step up to that higher level of revenue? And as a gating factor, just the integrated circuit shortages. So you're $55 million now. When does it go to $63 on average?
spk09: It'll be linear. Yeah, it will be linear. Normally our fourth quarter is our best quarter, you know, and – It's amazing. Usually the third quarter is really low because of the Christmas holiday and the Chinese New Year and that kind of thing. But if you look at it, the third quarter revenue-wise was quite good as well. But the fourth quarter is usually our highest quarter. And normally our summer quarter or the holiday quarter is the lowest, but that hasn't happened either. It's just continued to grow on a linear basis.
spk04: Okay. And then just on the SG&A line, it was $13.1 million in the prior quarter, and it was $13.9 million this quarter. What were the drivers behind that, and is the $13.9 million, maybe $14 million a quarter, a good number on a go-forward basis?
spk13: Bob, you want to comment on that? Sure. Yes, Mike. Sure. Well, to answer your question versus second versus third quarter, you know, we continue to accrue our, you know, employee incentive expense. We have merit increases that happen throughout the year versus the previous quarters and year. So most of that increase was in the employee compensation expenses. But, you know, quarter to quarter we have different factors that impact us. Going forward on the $14 million, yes, I expect it to be closer to that. in the fourth quarter and beyond. Next year, you know, to get that growth, we're going to have to make some investments, whether it's an SG&A or we talked earlier about working capital and capital expenditures. So I don't want anybody to think we can achieve this growth without making some of those. But $14 million is a good number with some growth next year going forward.
spk04: Okay. Okay. And then just on the magnetron business, Ed, I think on the – or someone else on the management team on the last call indicated, you know, there's a generator sale at $75,000 to $100,000, and then there's the tubes that are $7,000, and there's some question of kind of how much share you'd get in the generator space. Just any updated thoughts on that?
spk09: Yeah, this is pretty much in the hydrogen area where they're taking methane gas and converting it into acetylene and hydrogen, and they do that with a 100-kilowatt generator. And the tube that goes into that generator is about $7,000. By the way, our competition just raised their price to almost $11,000 for those magnetrons. So it will be interesting to see what happens there. But $7,000 or $8,000 has been in the area where we've been in the past. And the generator is, depending upon what bells and whistles are on it, it's a $100,000 generator. And quite often we get the tube business. We have lots of competition in the generator business. And the three companies that are startups that we're aware of in the United States wanted to buy 100 generators each. It gives you an idea, you know, what the potential could be. And, you know, other than some beta orders, we don't have any mass production orders on those, but it just gives you some idea what the hydrogen business is going to be in the future or could be.
spk04: Okay. And then just the semi-cap equipment and market, what type of growth are you looking for into next fiscal year for that business line?
spk09: Well, Lamb's our largest customer there, and we pretty much follow their guidelines. What are they telling us now, Wendy, we do those vendor meetings?
spk10: Yeah, kind of low double digits, 10% to 15% is what we're expecting. They have their own supply chain challenges that I think are limiting their growth
spk04: Okay, so would that translate into like a $27, $28 million number for that business?
spk10: Yeah, that's a good number.
spk04: Okay, and then just last question for you on the inventory. I understand why it's been building up over the last few quarters, but just from a day's standpoint, do you think that's stabilized now, or will you need to continue to kind of build up ahead of revenues?
spk09: I think it will continue. We try, and it's one of the reasons why we maintain so much cash. Part of the reason why we're successful is we can supply products that other people can't, and that comes from buying inventory well in advance, particularly what Jens is talking about where he's buying LCDs a year in advance to guarantee these big OEMs that they're going to have the display that runs their $3 million piece of equipment.
spk04: Okay. Okay. I mean, there's obviously a cost to having higher working capital. Have you thought about, or maybe you've already done this, just building that into your price and just having that discussion with the customers that your cost of doing business because your working capital requirements have gone up is higher and it really needs to be reflected and you're delivering a lot of value to your customers and it's not reflected at this point? Right.
spk09: Now, we certainly try to do that. Unfortunately, when you're working with these companies, frame contracts that are a year out, you get caught like we have, you know, in short term. But we'll recover from that, and we'll be able to increase our prices as we go along.
spk04: Okay. I appreciate your time. Thank you. Thank you.
spk01: Our next question will come from Mike Schillinger from Microcap Club. You may begin.
spk12: Yes. Regarding conversion. Hello. Regarding converting backlog to sales, can you characterize what percentage of that challenge is supply chain versus personnel?
spk09: Yeah, no, no. It's not personnel. For instance, on the magnetrons, in the normal year, on the YJ1600, we build 800 a year. And we went from building 800 last year to we have orders for over 5,000 right now. And so what we've had to do is to build new test sets. We've had to add ovens. We had to add vacuum pumps, all kinds of jigs, dies, tooling, and fixtures. And delivery on that, a lot of it we build in-house. But what we have to buy, some of them as long as six months. And that's the kind of thing that we've run into. We've geared up now where we can build 200 or 300 a month, and we're going to gear up to build 400 a month. But to get the equipment to do that is what the delivery time has been.
spk12: Okay. Thank you very much. Sure. Thank you.
spk01: And our next question will come from David Schneider. As a private investor, your line is open. Hi. Can you hear me okay? Hi, David.
spk10: Yes.
spk05: Oh, great. Yeah, just a quick question. An earlier person on the call couldn't figure out why the stock was where it is now. This is just my opinion, and then I'll ask questions. I just think people nowadays, I think people will like the stock more at 17 than 11.62. It's just human nature. And so the fact that it's 11.62 now, to me, doesn't bother me at all. And the other part, now back to the questions, I did notice the, and I think you did go over this, I just need a little clarification. I do monitor inventories, and so the sequential increase in inventories seems to have grown faster than the increase in revenues. And I'm thinking that maybe to sell finished products, there's a few maybe bits and pieces that you're waiting for delivery on so you can ship things out and book it as revenues. Can you maybe just explain that?
spk09: That happens a lot, particularly in Greg's business, where the customer, they want a complement of five different semiconductors and Yeah, and to ship complete, and, you know, we only have three of them or four of them in stock, so we're holding the inventory until we can get the fifth one to ship the kit, if you will, and that happens.
spk05: Okay.
spk09: Same thing happens when we're building equipment for LAM. If we're short some kind of a capacitor and we've got all the other components for a piece of equipment, we might have $1,000 worth of raw material waiting for a $3 capacitor.
spk05: And so as far as flipping over to the overall company being free cash flow positive, would a big part of that being just that backlog in inventories turning that into cash, or what other factors would be going on?
spk09: Well, that has a lot to do with it. Obviously, the more money we make, you know, then we cross the line. It looks like we'll be cash flow positive next year. That's sort of our, you know, our forecast. We've done, Bob, you've done what, a four or five-year cash flow?
spk13: Yeah. Yeah, we certainly expect the cash flow to improve, certainly as sales continues to grow at 15% to 20% a year. And so, yeah, next year will be a transition year. You know, hopefully we'll get the cash flow neutral. If not, we'll be close. And then after that, yeah, our forecast is to generate significant amounts of cash. I think we talked about that earlier with some other people on the call.
spk05: Okay, that's great. Your tax rate was 17% in the quarter you released yesterday, and I know the state of Illinois, they suspended the use of some carry-forwards there. For the fiscal year that starts, I guess, what, June 1st, what do you think your overall tax rate is going to be?
spk13: Yeah, I'm forecasting 27% effective tax rate for fiscal 23, and That includes, I think I've mentioned this before on other calls, but we do anticipate we'll be using all of our federal NOLs by the end of this fiscal year. So we have to factor in federal tax next year. So I would assume, or I'm using a 27% rate going forward. But then once Illinois, we can use the Illinois NOLs again after fiscal 2023, I expect that to go down as we can utilize those in fiscal 24 and beyond. So for those years, fiscal 24 and beyond, I'm using 23% as my estimated effective tax rate.
spk05: Okay. Well, that's good. And how big is the Illinois carry forward?
spk13: It's over $40 million. Significant.
spk05: Okay. All right. Yeah, I'll probably email some other questions. And, yeah, I'm happy that fundamentally you're doing well, and that's the most important thing.
spk09: Thank you very much.
spk01: Thank you. And I'm not showing any further questions. I'd like to turn the call back over to the speakers for any closing remarks.
spk09: Okay. Well, thank you for your interest and your investment in the company, Richardson Electronics. We're optimistic about our future, obviously, and hope you are as well. If you'd like to discuss our results, you know, we're a very flat organization. Call us any time. Happy to talk to you. Or better yet, come and see us at easier to show you what we do than tell you about it. And we look forward to discussing our fourth quarter and full year performance with you in July. Thank you very much.
spk01: And this concludes today's conference call. Thank you for participating.
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